You Should Have Seen These Biotech Failures Coming

Hindsight is 20/20 and predicting clinical trial results is rarely easy, but the falls of OXiGENE (NAS: OXGN) and Rexahn Pharmaceuticals (ASE: RNN) today -- both down more than 30% -- shouldn't come as a huge shock to investors.

OXiGENE said yesterday that combining its oncology drug Zybrestat with Roche's Avastin and two chemotherapy drugs didn't extend survival of lung cancer patients beyond what Avastin plus standard chemotherapy could do on their own.

Rexahan's decline stems from a failed clinical trial as well. One of the company's lead compounds, Serdaxin, failed to decrease symptoms of depression more than placebo.

What telltale sign should have helped investors realize that the companies were a long shot? Before the news, Rexahan was a $97 million company and OXiGENE only sported a market cap of a measly $27 million. The discount price means potentially higher returns, but that could also be a sign there's something amiss.

You have to assume that many investors -- probably with substantially larger portfolios than yours -- have already looked at the relatively cheap biotech and passed. The market will miss a few, but in general they tend to do a good job knocking down the value of long-shot biotechs.

I think most investors would be best off avoiding all biotechs with sub-$100 million market caps. Sure, you'll miss some rockets. Vanda Pharmaceuticals (NAS: VNDA) traded as low as $0.45 before its surprise Food and Drug Administration approval caused shares to shoot up over $14 per share. But finding the next Vanda or Human Genome Sciences (NAS: HGSI) -- and its 6,300% return -- is mostly a shot in the dark.

While I'd argue for giving up the dark horses that have the potential to bring mind-blowing gains, there's still plenty to be made in biotechs that have been vetted and assigned higher values by investors. Inhibitex (NAS: INHX) more than doubled today after announcing that its hepatitis C drug is working well. And yesterday, Medivation (NAS: MDVN) posted similar gains on positive data for its prostate cancer drug. Both had market caps significantly greater than $100 million before their jumps.

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